Thomas Cook Regulatory News (TCG)

11 February 2016

First Quarter Results for the three months ended 31 December 2015

Good start to the year despite challenging trading conditions

Notes

(i) 'Underlying' refers to trading results that are adjusted for separately disclosed items that are significant in understanding the ongoing results of the Group. Separately disclosed items are explained on page 5

(ii) 'Like-for-like' changes adjust for the impact of disposals, foreign exchange translation, fuel and other. The detailed like-for-like adjustments are shown on page 7

(iii) 'Like-for-like' net debt adjusts the prior year comparative for foreign exchange translation, the impact of changing finance lease arrangements, new equity investment and disposal proceeds to give a true, underlying change in Net Debt as set out on page 6

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a better explanation of performance.

Improved Q1 performance in line with expectations

· Group revenue of £1,409 million, up by 1%

· Gross margin increase of 20 basis points to 22.2%

· Underlying operating loss improved by 11% to £49 million

Continued focus on customer excellence delivering results

· Further growth in demand for higher margin differentiated holidays; sales to own-brand hotels up by 24%

· Robust customer demand in UK and Northern Europe offset tough trading conditions in Continental Europe and Airlines Germany

· Launched new training programme for customer-facing colleagues, focused on excellent service

· Implementation of the New Operating Model, our Group-wide transformation programme, on track

Current trading resilient despite market disruption

· Winter 2015/16 trading in line with expectations - 82% of the programme sold, broadly the same as this time last year, with significantly higher pricing

· Summer 2016 programme is 29% sold, 2% less than last year, with firm pricing in most source markets

· Clear signs of recovery after customer confidence impacted by the tragic events of Paris and Istanbul

· Disciplined capacity management and continued focus on quality helping to optimise margins

· We have rebalanced our programme to include more holidays to the Western Mediterranean in anticipation of changes in customer demand

Peter Fankhauser, Chief Executive of Thomas Cook commented:

"We've made a good start to the year, despite challenging trading conditions. Having acted fast to offer our customers a broad range of alternatives to Tunisia and Egypt, we delivered a 1 per cent increase in revenues in the first quarter. We also increased our gross margin by 20 basis points thanks to our focus on selling higher-quality package holidays. Sales of holidays to our own-brand hotels grew by a further 24 per cent, following strong growth in the prior year.

"Looking across the Group, our Northern European business continued to see strong customer demand over the three months, while the turnaround in our UK business delivered further improved results. Elsewhere, our businesses in Germany continued to face tough trading conditions in a very competitive market. Overall, trading for Winter 2015/16 is robust, and we have been able to maintain good margins across almost all of our source markets, helped by a strong online performance.

"It is clear that the awful attacks in Paris and Istanbul impacted confidence, leading some customers to delay booking their holidays. However we've seen clear signs of recovery in recent weeks: customers still have money in their pockets, and want to go on holiday. In this uncertain geopolitical environment, we are also seeing more of our customers choose a package holiday, valuing the greater security it provides.

"We have the scale and flexibility to give customers a wide choice of destinations, in both the Western and Eastern Mediterranean, the Caribbean and other long haul destinations, and our experienced high street and call centre staff are on hand to offer customers the best advice.

"We will continue to focus on delivering our strategy - strengthening our own-brand hotels and flights offering, and investing to ensure that customers who choose Thomas Cook get consistently excellent customer service. Thomas Cook is now a significantly stronger and more resilient business, and we are well positioned in a challenging market. We are maintaining our previous guidance for the 2016 financial year, provided that the recent recovery we have seen in customer confidence is sustained."

Presentation to equity analysts

A conference call and webcast for investors and analysts will be held today at 08.30 (GMT). The access details are as follows:

United Kingdom 020 3059 8125

All other locations + 44 20 3059 8125

http://webcasts.thomascookgroup.com/thomascook008/default.asp 

Forthcoming announcement dates

The Group intends to issue a pre-close update on 22 March 2016, and announce its results for the six months ended 31 March 2016 on 19 May 2016.

Enquiries

CURRENT TRADING AND OUTLOOK

Winter 2015/16

The Winter season is trading in line with our expectations, with 82% of the programme sold, broadly the same as this time last year. Total bookings for the Group are 2% lower than last year, while average selling prices have increased by 4%.

UK bookings are down 2%, reflecting a rebalancing of capacity mix away from charter risk and towards seat-only to optimise margins. The actions we have taken to improve product quality and grow our winter sun business, particularly in long-haul, have led to strong pricing trends, with both charter risk and seat-only pricing up by 10%. This resulted in a blended uplift in UK average selling prices of 2%.

Northern Europe continues to perform strongly, with bookings and average selling prices higher than last year by 4% and 9% respectively. The business has increased capacity by 4% for the Winter amid strong customer demand and, combined with strong pricing, this has led to improvements in revenue and margin.

In Continental Europe, while total bookings have declined 8% due to the competitive pressures we reported previously, average selling prices are 5% higher as we focus on increased sales of differentiated holidays, including a greater proportion of long-haul holidays, particularly in Germany and France.

For Airlines Germany, bookings and average selling prices are 2% lower, reflecting weaker consumer demand and increased competition, particularly in the short haul sector.

Based on cumulative bookings to 7 February 2016

Notes: (i) Risk and non-risk customers

(ii) Risk customers only

(iii) UK average selling price is up by 10% for both charter risk and seat only, resulting in a 2% increase on a blended basis due to the change in mix

(iv) For the tour operator only, the Winter 2015/16 season is 90% sold, 2% higher than last year

Summer 2016

Our Summer 2016 programme is 29% sold overall, 2 percentage points lower than last year. Having got off to a strong start, bookings were disrupted by the recent tragic events in Paris and Istanbul, which affected consumer confidence and caused some customers to postpone booking their holidays, leading to a later booking pattern overall for the season.

During this period of disruption we have pursued a strategy of focusing on margins over volume, and have reduced our charter risk capacity for the Summer season by 3%. This has led to strong positive pricing trends in Northern Europe and the UK, with average selling prices for package holidays up by 6% and 4% respectively. This has also been driven, in part, by a positive web performance, with UK online sales up by 7% for the season to date.

This strong performance has been offset by Continental Europe and Airlines Germany, which continue to be impacted by weaker consumer demand and competitive pressures. Overall for the Group, Summer 2016 pricing has been maintained at last year's levels, while total bookings are down 5%, partly reflecting the capacity reduction described above. We retain the flexibility to further adjust capacity up or down depending on demand for the remainder of the booking cycle.

In recent weeks we have seen clear signs of recovery in customer confidence across almost all of our source markets.

Outlook

We are satisfied with our trading position so far this financial year, with robust Winter 2015/16 trading and a good start to Summer 2016. Although bookings have been disrupted by geopolitical concerns which have affected consumer confidence, in recent weeks we have seen clear signs of recovery. Underlying demand for our holidays remains strong, as we continue to improve our product quality and customer experience, and as consumers are buoyed by low oil prices, low interest rates and low inflation.

Having anticipated a higher risk of disruption this year, we have worked proactively to rebalance our programme to match changes in customer demand, adjusting our in-house flying capacity and route networks, and securing additional hotel rooms particularly in the Western Mediterranean where demand is strongest. This leaves us well positioned to manage demand and accommodate customer preferences for the remainder of the booking period.

Supported by our flexible destination strategy and expected benefits from the New Operating Model, we are maintaining our previous guidance for the full year. We caution, however, that it is still relatively early in our financial year, and this guidance is dependent on the recent recovery we have seen in customer confidence across our source markets being sustained.

OPERATING AND FINANCIAL REVIEW

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a better explanation of performance

Group Performance

Group revenue increased by £16 million (or 1%) to £1,409 million, due to growth in sales of holidays to Spain, long haul destinations, and new seat-only routes, offsetting the impact of the closure of both Tunisia and Sharm-El-Sheikh in Egypt, and reduced sales to Turkey.

Group gross profit of £313 million was £7 million higher than last year, while gross margin of 22.2% represents an improvement of 20 basis points over the same period last year, reflecting an increased proportion of differentiated holidays sold, especially to own-brand hotels.

Group underlying operating loss during the first quarter improved by £6 million to £49 million, a year-on-year improvement of 11%.

EBIT separately disclosed items of £29 million were £9 million higher than last year, mainly due to a one-off provision of £14 million resulting from a strategic review of our UK store network. The remaining EBIT separately disclosed items relate to restructuring and other costs incurred as part of the implementation of our New Operating Model.

Group loss from operations for the first quarter was £78 million, £3 million higher than last year and loss before tax was £116 million, an improvement of £1 million.

Segmental EBIT Performance

Our UK business improved underlying EBIT by £13 million (21%), reflecting a higher margin sales mix supported by a strategy to optimise load factors by better matching capacity with demand, particularly during the October half-term, which helped improve gross margin by 130 basis points to 21.6%.

Northern Europe improved underlying EBIT by £8 million, as the positive trading performance reported at the end of FY15 continued. Strong customer demand for our high quality and exclusive holidays enabled a further improvement in gross margin of 230 basis points to 28.5%.

Seasonal losses in Continental Europe increased by £6 million to £19 million, reflecting a weaker gross margin (down 90 basis points to 13.3%), as the weak trading conditions in Germany that we highlighted in our full year results statement in November 2015 continued.

Underlying EBIT in Airlines Germany declined by £8 million against a strong prior-year comparative. In spite of continued growth in long haul, demand weakness and market overcapacity in the short and medium haul sectors has adversely impacted profits, leading to a reduction in gross margin of 70 basis points to 28.6%.

Net debt

The components of the movement in Net Debt over the last 12 months are as follows:

Net debt at 31 December 2015 of £1,195m has reduced by £67 million since the same time last year. On a like-for-like basis, excluding the impact of new equity, exchange rate movements, and other non-cash adjustments, net debt has reduced by £23 million. This like-for-like change has been affected by the reversal of FY15 year-end working capital timing differences of £60 million, which we highlighted at our full year results in November.

Hedging of Fuel and Foreign Exchange

The proportion of our forthcoming requirements for Euros, US Dollars and Jet Fuel that have been hedged are shown in the table below.

As at 1 February 2016

As Jet Fuel is priced in US Dollars, we buy forward the requisite amount of US Dollars from a mix of base currencies. For the full year FY16, we estimate that our net fuel costs will fall by around £100 million compared to FY15, although our prudent assumption is that we do not expect to retain these benefits.

The Group's policy is not to hedge the translation impact of profits generated outside the UK. If current rates for Euro and Swedish Krona were maintained throughout the remainder of FY16, there would be a positive year-on-year translation impact of approximately £11 million.

The average and period end exchange rates relevant to the Group for the quarter were as follows:

APPENDIX

Like-for-like analysis

'Like-for-like' (LFL) changes adjust for the impact of disposals, foreign exchange translation, fuel and other.

To assist in understanding the impact of these factors and their influence on year on year progression, we consider 'like-for-like' adjusted growth from the 3 month period to 31 December 2014 to the 3 month period to 31 December 2015 in our analysis below: